New Rule Will Protect Students Defrauded By Colleges

The U.S. Department of Education (DOE) has released a proposed rule that has the effect of forgiving student loans if students were defrauded by their college. The rule would also bar colleges from creating mandatory arbitration clauses and class action waivers for students. The Obama administration’s rule will protect students from wrongs committed by their colleges and provide ways for those students to escape their debt or fight back against those who wrong them. DOE Secretary John B. King, Jr., said in a statement:

We won’t sit idly by while dodgy schools leave students with piles of debt and taxpayers holding the bag. All students who are defrauded deserve an efficient, transparent and fair path to the relief they are owed, and the schools should be held responsible for their actions.

Reportedly, the rule would do the following:

• The regulation would allow groupwide loan discharges for students who have faced misconduct by their colleges. Colleges would also have to pay if they “engage in misconduct or exhibit signs of financial risk,” based on specific triggers, the agency said.

• Schools that are financially risky or whose students often have bad outcomes on their loans would have to specifically and clearly share that information with prospective and current students, as well as the public, according to the proposed regulation.

• Schools would be banned from using predispute arbitration clauses to prevent students from bringing the schools to court or filing class actions.

Colleges place those clauses in enrollment agreements and other documents, according to the DOE, and also tend to include gag clauses that stop students from speaking out about wrongs committed. DOE Under Secretary Ted Mitchell said in the statement:

These regulations would prevent institutions from using these clauses as a shield to skirt accountability to their students, to the department and to taxpayers. By allowing students to bring lawsuits against school for alleged wrongdoing, the regulations remove the veil of secrecy, create increased transparency, and give borrowers full access to legal redress.

Public comment will be accepted through Aug. 1, and the final regulation will be published by Nov. 1. This proposed regulation comes just over a year after the White House released a Student Aid Bill of Rights, saying it was looking into ways to make student debt less permanent, such as by allowing both federal and private loans to be forgiven during bankruptcy and extending protections that other forms of consumer debt enjoy to student debt. President Barack Obama ordered his cabinet and the Consumer Financial Protection Bureau to look into measures “such as notice and grace periods after loans are transferred among lenders and a requirement that lenders confirm balances to allow borrowers to pay off the loan,” according to a March 2015 fact sheet.